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Downturn Creates Uptick in Small Loans

The economic downturn has expanded the demand for micro-financing, but experts warn that a shrinking economy, job losses, and factory closures will not be saved by small loans.

Micro-finance loans, ranging from $50 to $10,000 are vital for Cambodians wanting to start their own businesses. In recent months, with factories struggling under the downturn, the number of people venturing into these enterprises has risen.

“Due to the global financial crisis, a lot of garment and construction workers have lost their jobs,” Huot Eang, president of the Cambodia Association of Microfinance Institutions, said in a recent interview. “They lose their income, and then they have to look for another career. Now they need the capital from our institutions for their new jobs.”

About 50,000 workers from garment and construction sectors have lost their jobs due to the global crisis, according to a February report by the International Labor Organization. Fourteen garment factories closed in the last two months, as export revenue dropped from $200 million to $100 million dollars per month, according to government figures.

Those numbers add up to worries of recession, in an economy that was galloping ahead in recent years. The International Monetary Fund has warned that the Cambodian economy will contract half a percent in 2009, compared to its growth of 6.7 percent in 2008.

But in the face of declining figures, total lending of micro-finance institutions in 2008, as the global financial crisis emerged, was $438, million, up from $271 million the year before, according to the Cambodia Association of Microfinance Institutions.

The increase of small lending in the microfinance industry could be good for Cambodia’s economic growth and poverty reduction, as it connect rural households to the formal financial sector, Eric Sidgwick, senior economic expert of the Asian Development Bank, said in an email.

But other economic experts worry small loans will make little impact against the slowdown of in the country’s economy, especially while medium-sized loans from many large commercial banks are reportedly in decline.

“Loans from micro-financing are too small, compared to our economy’s resources,” Som Ganty, a financial expert at the Royal University of Law and Economy, said recently. “So no matter how much it is going to increase, it will not help as much on our economy as commercial loans.”

Ngy Tayi, undersecretary of state for the Ministry of Economy and Finance, agreed, but he said he was optimistic that small loans could prevent Cambodia’s economy from further decline.